Leasing real estate to your own company

Mr. Novák's story: Mr. Novák, a successful businessman, decided to rent his family villa to his own company. He wanted to keep things in order and also hoped to get tax breaks. Everything sounded great, but after a few years, he got a shock: the tax office assessed his company hundreds of thousands in taxes, penalties, and interest! Why? Because he took advice from a “friend who was an accountant” and overlooked key rules for transactions with related parties. Avoid his mistakes and protect your assets!

Author of the article: ARROWS Law Firm (Mgr. Jan Pavlík, office@arws.cz, +420 245 007 740)

I. Are you a related party? Beware of tax risks!

Leasing real estate to your own company or another related entity is common in business. But be careful, in the eyes of the law, it is not “just” you and your company. You are what is known as related parties. This means that the law (specifically the Income Tax Act and the Business Corporations Act) views you as entities with mutually influential relationships.

When are you related parties? Typically, if:

• You have a direct or indirect share of at least 25% in the registered capital or voting rights.
• One person is involved in the management or control of the other.
• You are close persons (relatives, spouses, partners).

If you fall into the category of related parties, a whole range of specific rules and obligations apply to you. This is not just a formality, but the key to your tax peace of mind!

II. The key to tax peace of mind: the arm's length principle

The most important rule for transactions between related parties is the so-called arm's length principle. What does this mean? Simply put, the price you charge for rent must be the same as you would have agreed with an independent, unrelated person. The tax office will always ask: “How much would an unrelated tenant pay for this property?”

What to watch out for:

• Usual rent: Determining the ‘usual’ rent is key. It needs to be documented by comparing it with similar rents in the area. No “friendly” discounts!
• Income tax: Rental income is normally taxed for legal entities.
• VAT on rentals: Please note that although property rentals are generally exempt from VAT, there are important exceptions! If you are both VAT payers and the rented property is not used for residential purposes, you can agree on VAT taxation. This may allow you to deduct VAT on the landlord's side, but you must also pay VAT. For residential rentals, exemption is always mandatory.
• Accounting and depreciation: You can account for property-related costs in the same way as depreciation of assets.

III. You may face heavy fines and additional tax assessments!

Failure to comply with the arm's length principle and the associated rules has very serious consequences. The tax office checks these transactions very carefully.

What happens if you make a mistake?

• Additional tax assessment: The tax office may assess additional income tax on the difference between your “friendly” price and the usual price.
• Penalty: Add 20% penalty to the additional tax automatically.
• Interest on arrears: Plus interest on arrears on the additional amount.
• Fines: For late submission of reports with related parties.
• Liability of executives: In extreme cases, this may even constitute a breach of the duty of care and personal liability of executives!

A myth that can ruin you: Many entrepreneurs mistakenly believe that “domestic” transactions are not an issue or that “any” rental agreement is sufficient. This is a huge mistake! It is precisely these transactions that are under scrutiny by the Financial Administration.

Who can you contact  ?

IV. How to do it right: Secure renting step by step

To avoid Mr. Novák's problems and ensure a good night's sleep, proceed systematically:

1. Thorough analysis and documentation:
• Comparative analysis: Find out the real market rent. This is not just an estimate, but a qualified analysis of similar properties.
• Transfer pricing documentation: Although not explicitly required, it is crucial for defending your prices before the authorities. It should describe in detail how you determined the price and why it is market value.
2. A contract with a “market” spirit:
• The lease agreement must reflect the principle of market distance. It should include clauses on regular rent reviews (e.g., an inflation clause, but with regard to market conditions).
3. Corporate approval: For significant transactions, don't forget to obtain the approval of the general meeting.
4. Ongoing monitoring: Regularly assess whether the rent is still market-based. The market is evolving!
5. Mandatory reports: Don't forget to fill in the “Overview of transactions with related parties” in your tax return if you meet the criteria (e.g., certain turnover or assets).

V. Need certainty? Trust the experts!

The issue of leasing real estate between related parties is complex and has many hidden pitfalls. A mistake can cost you tens or even hundreds of thousands of dollars. An experienced lawyer can help you:

• Analyze your specific situation and identify risks.
• Set up an optimal and legal structure for the lease.
• Prepare a robust lease agreement and the necessary transfer pricing documentation.
• Represent you during tax audits.

Don't play with fire when it comes to your property! Investing in legal advice will pay off many times over in this case. Contact us for a non-binding consultation and ensure your peace of mind.

Don't want to deal with this problem yourself? More than 2,000 clients trust us, and we have been awarded the title of Law Firm of the Year 2024. Take a look HERE at our references.